Home Loans

3 Reasons You Shouldn’t Pay Off Your Home Loan Early

home loan payment singapore

Joanne Poh



For many people, being chained to a property loan is like being in prison. Forget about quitting your job or going on an unpaid sabbatical, because there are home loan repayments to be made for almost the rest of your life.

So being able to finally pay off your property loan early can feel like being released from jail for good behaviour. Why wouldn’t you want to free yourself from the burden of making loan repayments forever? Well, here are 3 good reasons it might make financial sense not to pay off your loan early.


You can invest the cash at a higher rate of return

While a home loan is probably the biggest loan you’re ever going to take in your life, it’s also the cheapest in terms of interest. Try asking the neighbourhood loanshark for a 1.5% interest rate and you’ll either be running for your life or patting him on the back as he howls with laughter.

If you’ve got $100,000 left on your home loan at an interest rate of 1.2%, it makes more financial sense to invest $100,000 at a higher interest rate than to use it to pay off your loan now. Even a conservative investor shouldn’t find it too difficult to get a return of over 3%, which is significantly higher than what it costs you to borrow that money.

Conversely, if you pay off the $100,000 (and we’re not even counting the repayment fees that your bank might charge you), you’d be sacrificing that amount you would have earned by investing the $100,000 minus the amount you would have paid in interest to the bank.

Not that this amount is offset a little by the extra money you would save due to no longer having to make loan repayments. But this amount is going to accrue gradually over a long stretch of time, and might not necessarily translate to equivalent investment gains.


You can put the cash to better use

Your home loan may be a pain to pay off, but always remember that it is relatively cheap. Even if you’re not about to invest the money you would otherwise use to pay off your home loan in full, you might be able to find better ways to use it—ways that can pay off somewhere down the road.

For instance, let’s say you’d like to further your studies by taking a degree course overseas. You could either:

  • Choose to redeem the remaining $100,000 on your 1.2% interest rate home loan and then take up a study loan for $50,000 at 4.5%, or
  • Hold off on paying off your home loan and use the cash to pay for your studies in full instead.

Redeeming your home loan would lead to your paying $1,050 more in the grand scheme of things.

And given the fact that furthering your studies could increase your income later on, you would be placed in an even better financial position by holding on to your home loan and using the money to educate yourself instead.


You have mortgage insurance

If you’ve paid for mortgage insurance, you actually have less of an incentive to pay off your mortgage early. You see, when you take out a home loan, you’re running the risk that if you should get retrenched, fall ill and be unable to work or (choy!) die and the home loan instalments don’t get paid, you or your family are going to be placed in the unenviable position of having the property swallowed up by the bank.

However, when you have mortgage insurance, should something unfortunate happen to you you’ll get a cash payout that will cover the rest of your home loan installments. That means there’s actually very little risk that you will default on your loan.

So if one of your reasons for wanting to pay off the loan now is that you don’t want to risk losing your property to the bank somewhere down the road, having mortgage insurance reduces this risk considerably.

In fact, should something actually happen to you somewhere down the road (choy!), you’ll regret having spent all that money trying to pay off your home loan earlier.


One Last Thing

If you are trying desperately to pay off your home loan early because you feel the interest rate you’re paying is too high, that may not be such a good idea (for reasons stated above). However, there is an alternative and that is to refinance your home loan to a better package. You don’t have to jump through hoops just to get one, and that’s where the MoneySmart Refinancing Wizard can help. Make sure you’re not overpaying for your house and put those savings to better use.

Are you planning to pay your home loan off earlier? Tell us why or why not in the comments!

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Joanne Poh

In my previous life, I was a property lawyer who spent most of my time struggling to get out of bed or stuck in peak hour traffic. These days, as a freelance commercial writer, I work in bed, on the beach, in parks and at cafes, all while being really frugal. I like helping other people save money so they can stop living lives they don't like.

  • Rokawa Hakim

    I paid off the loan in 3years for my 95 yr lease with just cpf oa n no regrets. Peace of mind. Im 31 n still got decades to compound my cpf oa if I still got mood to work.
    Though I would nvr fork out cash.

  • Smint Teo

    are you trying to help people or making couples quarrel over your article?
    Pls state that this is your personal point of view. or rather. give concrete evidence that one could really earn that 3% interest as a guaranteed.
    2ndly pls state in detail your analysis does it apply to other type of housing loans. eg HDB housing loan that a fix rate of 2.6%
    3rdly.. you talk all about bank loan. do you actually know that it is a fracturing interest.

    • SGSGgirl

      yup.. she should list what investments that give returns at 3%
      if you don’t refinance, you might end up with a 3-4% housing loan with banks. it’s just in 1st 2 years where they offered you lower than 2%
      insurance payout are also very troublesome and not 100% guarantee.

  • Edith Esquivel

    Well, in Mexico even government subsidized mortgage interests are above 10%, and it is very difficult to match that percentage through investments. I am amazed interest rates in Singapore are so cheap. There, it would make sense to invest the money instead.

  • Edw

    Hi Joanne! Thank you for sharing your insights in home loan!

    I would like to seek your opinion on my own situation.

    If I am intending to buy a HDB BTO property now, would I have to reconsider taking a long loan term if I’m keen in upgrading to another property within a shorter period (say.. 10-15 years) with a new loan?

    because, from my little knowledge.. If I would like to take a new property loan with an existing housing loan, I could only get a loan for 50% of the new home purchase price.

    in simple terms, i would not be able to leverage on a lower down-payment for an upgrade on the next loan and at the same time, be charged a much higher interest amount totaled over the years.

    do correct me if I’m wrong with the figures. I hope to hear from you soon!. 🙂 Thank you!